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Rs 250 billion that investors poured into 3,500 companies have vanished!

Syed Firdaus Ashraf in Bombay

The era of liberalisation and economic reforms that started in 1992 may have ushered in a boom period for corporate India and the capital market, but the small investors continue to reel from the losses inflicted on them by new-born new-age companies.

Market analysts would prefer to call these "vanishing companies".

A look at the list of listed companies in 1992 at India's premier bourse, the Bombay Stock Exchange, indicates that nearly 550 companies have since been delisted or they have disappeared.

Shailesh Ghedia, secretary, Investors Grievance Forum, says 550 is the "official" BSE figure, but the all-India figure could be six times higher. "No trading activity is taking place in nearly 3,500 companies and they are virtually not operating. I believe the total loss to the investors is nearly Rs 250 billion."

About 80 companies, which raised more than Rs 7 billion from the capital market during 1992-95, are now off market. Seven companies, which mobilised Rs 232.5 million from the market during 1997-98, are untraceable now.

Numerous non-banking finance companies and plantation firms, which raised huge amounts from investors through various deposit schemes, are now either missing or unable to repay their debts.

Out of 3,872 public issues offered in the market from 1992 to 1996, only 562 were traded above the issue price, while 205 were not traded at all on the exchanges. And promoters of 118 public offerings have disappeared without a trace.

The modus operandi of these companies is to offer lucrative collective investment schemes, attractive high-return fixed deposits, and initial public offers, sometimes at a premium, to mobilise huge funds from the public, disproportionate to the promoters's equity or finances.

They then divert these funds from the productive segment of the economy to various speculative activities like real-estate purchases, stock-market dealings and trading.

Ghedia says once the companies gain credibility flowing from listing at well-known bourses, they go in for public issues, often at a premium, raise a lot of money, and then default on exchanges' norms to get delisted, and then vanish.

It is learnt the early '90s boom saw several smaller firms get listed on the stock exchanges without having chalked out concrete business plans. Yet, they managed to raise millions from small investors by way of several instruments and IPOs. This was possible at that time as the market sentiment was positive and investors were upbeat. Even companies with weak fundamentals got a look-in.

However, the Securities and Exchange Board of India's senior executive director, O P Gahrotra, feels Ghedia's allegations are far-fetched.

Gahrotra says the term ''vanishing companies'' is inappropriate. According to him, any company which is registered on, say, the Bombay Stock Exchange can register itself at other exchanges. So getting delisted from one major exchange does not necessarily mean they have vanished, he clarifies. "A company can be said to have vanished only if there is no address of the company."

In India, getting a company incorporated and then listed is not a very difficult task. A company -- even the vanishing company, ostensibly -- seeks listing on a bourse to provide its securities with ready marketability, liquidity and negotiability, to ensure proper supervision and dealings therein and protect the interest of shareholders and general investing public.

Each exchange needs companies to meet with certain listing norms. For instance, a company, to get listed at the BSE, has to have an issued equity capital of Rs 100 million and above. It also has to submit a copy of annual results every year.

Companies can get de-listed from the exchange due to non-payment of listing fees, amalgamation and mergers, winding-up, liquidation, inadequate notice of book closure/record date, large number of investors' complaints and surveillance purpose.

Ghedia says, "Anybody can float a new company, raise money from the capital market and disappear. Some companies purposely default to get delisted so that they can disappear. We've been requesting successive governments to enact stringent laws, but all in vain."

While as many as 550 companies got delisted from the BSE since the early '90s, not many got off the National Stock Exchange. According to the manager (listing), the NSE, the SEBI had set up a committee under the chairmanship of K R Chandratre to look into and make recommendations on delisting on the recognised stock exchanges. The committee report was recently submitted, details of which are still not freely available.

A look at the number of complaints that pile up at SEBI every day reflects the enormity of the problem. During the fortnight ended April 15, 1999, SEBI had received 3,374 grievances against 946 companies. Only 1085 grievances were reportedly resolved by 238 companies.

According to SEBI, a few companies have against them more than a thousand grievances each from investors.

Analysts said companies are able to fleece investors only because the market regulator, the SEBI, lacks adequate powers.

They also said licensing authorities like the Department of Company Affairs and the Registrar of Companies display poor supervision.

Sources at SEBI said they have remained helpless from the beginning. The market regulator gained statutory recognition in January 1992. Its main objective as enunciated in the SEBI Act is to protect the interests of investors in securities and promote and regulate the securities market.

Except for partial powers under Section 11 of the Companies Act to regulate brokers and the stock markets through listing norms, SEBI has not been bestowed any statutory powers to effect search and seizure of assets of erring companies or their promoters nor disgorge ill-gotten profits.

SEBI is only permitted to impose a small penalty on companies violating listing agreements in limited circumstances.

In the recent past, several SEBI actions to protect the interests of investors were challenged by companies, intermediaries, stock exchanges and brokers, including Harshad Mehta.

For its part, SEBI has been demanding more powers to be an effective market regulator. The D R Dhanuka Committee had also recommended a more powerful SEBI.

At present, the SEBI Act gives limited powers like prosecution, suspension, or cancellation of registration and a monetary penalty of a measly Rs 500,000.

R C Mathur, former BSE executive director, said the BSE has been advised to launch a concerted effort to identify companies which do not seem to exist at their given addresses or who are in default of various listing agreement clauses. "We have identified a few such companies and have sent our report to SEBI," he said a few days before he quit.

Ghedia maintains that post-facto measures are seldom effective. "What we need are preventive measures."

Additional reporting: UNI

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